The Trouble With Amazon

By

July 15, 2010

Jeff Bezos loves numbers. In a speech in May to graduates at his alma mater, Princeton University, he recounted a childhood memory: when, driving with his grandmother, a heavy smoker, he calculated by how many years her addiction would reduce her life expectancy. Announcing the result from the back seat, he expected praise for his deft math. But his grandmother just burst into tears.

The Amazon founder’s geeky obsession with numbers evidently formed early, and despite the glimmer of discomfort revealed by his Princeton anecdote, his fervently quantitative take on the world clearly still predominates. In a letter accompanying the 2009 Amazon annual report, for instance, he sets out a mind-boggling 452 goals for the company in the coming year. The word "revenue" is mentioned only eight times, yet revenue growth is central to the Amazon story. Expanding both internationally and across other products—nonbook sales represent 75 percent of total Amazon turnover—Amazon’s global business has increased fifteenfold over the past decade, 28 percent last year alone. Sales in 2009 topped $24.5 billion. To put that in perspective, in 2008 total sales by all US bookstores were less than $17 billion. Amazon is today, by some margin, the largest bookseller in the world.

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Of all the goals in the report, Bezos proudly points out, no fewer than 360 deal directly with customer needs. The customer has always been king in the Bezos ethos, and the formula for keeping the king happy is straightforward. "Amazon gives the customers what they want: low prices, vast selection and extreme convenience," he told a shareholders’ meeting. On these terms, Amazon’s success is stellar. It has more than 2 million titles on sale; bestselling books are routinely discounted by 50 percent or more; and it ranked first in BusinessWeek‘s "customer service champs" awards last year. But dig beneath the surface of the numbers and a more complex picture emerges, one suggesting that, stats notwithstanding, readers and writers may ultimately not be best served by Amazon’s race to become the biggest, cheapest and most convenient bookseller around.

Amazon has not grown to where it is today by being touchy-feely. Sure, it adopted the informal trappings that characterized many of the new technology start-ups of the 1990s. But if Bezos’s first desk at the company was an old door on trestles, the business conducted from behind it has been as ruthless as anything he encountered in his previous gig as a Wall Street broker. Soon after Amazon’s launch in 1995, Bezos told his employees that he wanted a place that was both "intense and friendly" but that "if you ever had to give up ‘friendly’ in order to have ‘intense,’ we would do that."

This hard-nosed approach has not endeared Amazon to publishers, who have consistently felt the pressure of the company’s intensity, especially when it comes to setting terms. In researching this article, I uncovered widespread resentment about the aggressive way Amazon pursues its objectives, matched only by dread of being publicly identified as a critic of publishing’s largest customer. "They have no sense of collegiality," complained one publisher, who asked not to be identified. "They behave like pigs," said another, his voice dropping as he checked around to see if anyone was within earshot.

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(Disclosure: the new publishing company with which I am involved, OR Books, does not deal with Amazon. We sell direct to customers, channeling money that would otherwise go on discount and distribution to extensive promotion, primarily on the Internet.)

Dennis Loy Johnson, co-publisher of the Brooklyn-based independent Melville House, is one of the few publishers who have dared to speak openly about Amazon’s bullying. His story is far from atypical. In 2004 a representative of the retailer contacted Melville’s distributor demanding an additional discount. Such payments are illegal under antitrust law, which precludes selling at different prices to different customers. Large retailers circumvent this restriction by disguising the extra discount under the rubric of "co-op," money paid to the bookseller for promotional services, often notional. In this case the distributor did not bother with such niceties, describing what Amazon was after as "kickback."

Johnson resisted Amazon’s pressure and complained to Publishers Weekly about what he saw as the retailer’s capo-like tactics. What happened next evidently still rankles. "I was at the Book Expo in New York and two guys from Amazon came to see me. They said that the company was watching what we were doing and that they strongly advised us to get in line. I was shocked at how blatant the pressure was." Within a couple of days Johnson noticed that the buy buttons for his books had been taken off Amazon’s site, making Melville’s titles unavailable.

In the end Johnson, faced with an offer it was nigh impossible to refuse, agreed to the co-op. His books’ buy buttons were reinstated. Today Amazon is Melville House’s biggest customer, and though Johnson still regularly flays the company on his popular publishing blog Moby Lives, he also concedes that it is highly effective at bookselling: "They make buying so easy. It’s impossible to resist."

Another man who recently lost his Amazon buy buttons is John Sargent, head of Macmillan, the US arm of German book giant Holtzbrinck, home to many authors familiar to Nation readers, including Naomi Klein, Noam Chomsky and Barbara Ehrenreich. In January Sargent confronted Amazon over its insistence on setting the prices of e-books it sold on its site, generally at under $10. This was a concern throughout an industry worried that low prices of electronic versions would undermine profits from printed books and generally lower the perceived value of the product. Sargent informed Amazon that he wanted to move Macmillan to an "agency agreement," meaning that he, as the publisher, could price books at whatever level he chose, paying Amazon a fixed discount.

Amazon reacted with characteristic distemper: bye-bye Macmillan’s buy buttons. A face-off ensued. Amazon was vehement that its stand was on behalf of customers looking for bargains. A gallery of cynics openly suspected it had more to do with securing the future of its proprietary e-book reader, the Kindle, in the face of Apple’s imminent launch of the competing iPad.

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Something had to give, and a few days later it did: Amazon gave in with a statement revealing contempt toward the very idea of a publisher. "We will have to capitulate," it said, "because Macmillan has a monopoly over their own titles." The company’s hand had been forced by a preceding announcement that Apple had accepted an agency agreement with five of the six largest publishers. Unusual for Amazon, its suppliers had an alternative for selling their books.

It was the first time Amazon had ever given way in public on a big issue with publishers. And it may just have marked the beginning of a power shift between the retailer and its suppliers. Such realignment is long overdue, because the problems caused by Amazon’s business practices extend to fundamental matters of the future of the book business and the diversity of our culture as a whole.

Take the issue of choice: when it comes to the books it stocks, Amazon makes no pretense of selectivity. Provided it carries an ISBN and isn’t offensive, Amazon is happy to sell any book Joe Schmo cares to publish. "We want to make every book available—the good, the bad and the ugly," Bezos once said. Spurred on by Amazon and the growth of self-publishing companies like XLibris and Lulu, the number of new books being published has soared. According to industry statisticians Bowker, just over 172,000 titles were released in 2005. Last year "traditional" output had risen to 288,000 titles, a significant enough increase by itself. But adding what Bowker describes as "self-published" and "micro-niche" books, the total inflates to a staggering 1 million new titles in just twelve months.

Many would argue that the efflorescence of new publishing that Amazon has encouraged can only be a good thing, that it enriches cultural diversity and expands choice. But that picture is not so clear: a number of studies have shown that when people are offered a narrower range of options, their selections are likely to be more diverse than if they are presented with a number of choices so vast as to be overwhelming. In this situation people often respond by retreating into the security of what they already know.

As Barry Schwartz, author of The Paradox of Choice, explains, "When the choice set is larger, people tend to make worse choices. They choose on the basis of what’s easiest to evaluate, rather than what’s important to evaluate…the safe, highly marketed option usually comes out on top."

This apparent anomaly of greater choice resulting in a narrower selection finds a corollary in Amazon’s use of metrics to recommend titles based on previous purchases. The algorithms at work here are highly sophisticated and are widely credited with expanding consumer choice. Yet such metric-based systems can simultaneously increase the variety of books purchased by individual customers while decreasing the overall variety of books bought by everyone. This is because, as blogger Whimsley explains, "In Internet World the customers see further, but they are all looking out from the same tall hilltop. In Offline World individual customers are standing on different, lower hilltops. They may not see as far individually, but more of the ground is visible to someone."

The loss of serendipity that comes with not knowing exactly what one is looking for is lamented by ex-Amazon editor James Marcus: "Personalization strikes me as a mixed blessing. While it gives people what they want—or what they think they want—it also engineers spontaneity out of the picture. The happy accident, the freakish discovery, ceases to exist. And that’s a problem."

That sentiment is underscored by Charlie Winton, CEO of Counterpoint Press: "Shopping on Amazon is a directed experience—it works best when you know what you’re looking for. But how does that help with, for instance, a first novel? When independent bookstores were in a healthier state, staff picks and hand selling could bring attention to great books people didn’t know they wanted. Now that’s much harder."

The shrinking of that market share has certainly been severe. The number of independent bookstores in America has more than halved in the past two decades. The pleasure of browsing shelves stocked with care and intelligence by independent owners of stores like Midnight Special in Santa Monica, Cody’s in Berkeley and the Coliseum in Manhattan is only a memory. Their collapse is the byproduct of another tenet of Amazon’s business philosophy: low prices are always good for customers.

In addition to regularly offering bestsellers at more than 50 percent off, Amazon offers a wide range of titles for around a third off the recommended price. Such low prices have forced its competitors to follow suit. Last October Wal-Mart declared a price war on the online retailer. As part of the offensive, the big box store announced that it would sell Stephen King’s 1,074-page Under the Dome at just $10. Amazon promptly matched Wal-Mart’s discount; the two competitors then lowered the price by another dollar, selling at nearly 75 percent off the publisher’s $35 recommended retail price.

Of course, everyone loves low prices, but as with breadth of choice, the matter is more complex than it first appears. To achieve such low prices retailers must seek ever deeper discounts from publishers. A decade ago the average wholesale discount for a book was in the region of 40 percent. Today it’s more like 50 percent, and for many of the large outlets it can be 60 percent or more. Amazon clearly anticipates that the trend of deeper discounts and lower prices will continue. One prominent British publisher told me his sales director returned from a visit with Amazon at which he had been forced to grant better terms. "The good news," he reported back, "is they said I don’t have to go in and see them again for eighteen months."

Another London publisher, head of a well-known transatlantic university press, complained about the way Amazon undermined his company’s efforts to sell its titles direct. "They told us, in no uncertain terms, that if we tried to match the reduced price at which they were selling our titles they would take the lower price as the basis for calculating their discount, allowing them to price-cut still further."

Blocked at every turn in their attempts to escape this relentless race to the bottom, publishers have seen their revenues fall, forcing many to make cutbacks and concentrate more on lead titles, the blockbusters that, accountants tell them, are the most profitable component of their business. Fewer staff and falling promotion budgets mean that books by less established authors—the "mid-list"—receive ever shorter shrift.

The mid-list is the place where new talent has traditionally been nurtured, where publishers can take chances on less predictable titles. "Look at books like Amitav Ghosh’s Sea of Poppies or Roberto Bolaño’s Savage Detectives," says Paul Yamazaki, chief buyer at City Lights in San Francisco. "These are serious, sophisticated books that began life with modest expectations, but after dedicated work by the publisher and independent booksellers, they went on to reach wider audiences. This sort of publishing is under threat today."

The accumulated effect of Amazon’s pricing policy, its massive volume and its metric-based recommendations system is, in fact, to diminish real choice for the consumer. Though the overall number of titles published each year has risen sharply, the under-resourcing of mid-list books is producing a pattern that joins an enormously attenuated tail (a tiny number of customers buying from a huge range of titles) to a Brobdingnagian head (an increasing number of purchasers buying the same few lead titles), with less and less in between. Responding to the effects of price wars last fall the American Booksellers Association warned, "If left unchecked…predatory pricing policies will devastate not only the book industry, but our collective ability to maintain a society where the widest range of ideas are always made available to the public."

Authors, too, can be added to the list of price-cutting’s victims. In the fall of 2008, as the crisis of publishing began, a boss at Scribner, where I was a senior editor for two and a half years, announced at an editorial meeting that when it came to advances, "$50,000 is the new $100,000." Speaking with agents at this spring’s London Book Fair, I found widespread corroboration that advances had indeed dropped precipitously.

This is partly a reflection of the overall dismal state of the market. US book sales fell by nearly 2 percent in 2009, after a drop of more than 2.8 percent the previous year. It is also related, however, to a clause in many publishers’ contracts that reduces royalties paid to authors if sales are made to booksellers at a high discount, in some cases reducing the royalty by half. In this respect publisher, bookstore and customer appear to benefit from the lower price at the expense of the author. But lower advances and royalties make for less-well-researched books and an author pool increasingly populated by hobbyists rather than those whose primary qualification is the ability to write.

It’s hard to see how the allure of infinite choice and rock-bottom prices conjured up by Amazon can be dispelled, but there are slivers of hope. Independent bookstores, especially those hosting regular live events, may be making a comeback. Last year, membership in the American Booksellers Association rose for the first time, after two decades of decline. And 37 percent of 18- to 34-year-olds told a recent survey they preferred to buy their books from independents. At the other end of the business, the emergence of Apple as a competitor to Amazon, and Google’s recent announcement that it will set up its own online bookstore, may allow publishers wiggle room in negotiating terms.

At the Book Expo in New York City, Jonathan Galassi, head of Farrar, Straus and Giroux, spoke for many in the business when he said there is something "radically wrong" with the way market determinations have caused the value of books to plummet. He’s right: a healthy publishing industry would ensure that skilled authors are recompensed fairly for their work, that selection by trusted and well-resourced editors reduces endless variety to meaningful choice and that ideas and artistry are as important as algorithms and price points in deciding what is sold. Jeff Bezos and his beloved numbers are anathema to such an arrangement; the best things to number would be the days of his company’s dominance.